KABAM COLLIDER PROPOSAL TEAM THE VISIBLE HAND MEMBERS ZAREK BROT-GOLDBERG, PH.D. STUDENT IN ECONOMICS JORDAN OU, PH.D. CANDIDATE IN ECONOMICS

AGENDA AND OVERVIEW How do we deal with Apple’s strict pricing tiers? Implement region-specific sales strategies instead How do we establish the optimal “price”? Finding the optimal sales strategy requires knowing only the demand curve How do we estimate demand? Run an experiment (A/B testing) for each region, varying the sales strategy for each treatment group Final implementation and extensions

SETTING REGIONAL “PRICES” We want to vary prices for buying in-game currency across regions, but because of Apple’s restrictions, adjusting exchange rate not possible Instead, we consider thinking about discounts on the prices of in-game items (in terms of in-game currency) This changes the value of purchasing units with real currency Effectively similar (potentially better even) to adjusting exchange rate

TYPICAL CONSUMER PATH DollarsUnitsItems

TYPICAL CONSUMER PATH DollarsUnitsItems Can’t change this! So we’ll change this instead!

ESTABLISHING THE OPTIMAL PRICE Objective: Price p maximizes revenue Assuming zero marginal costs of providing virtual good Revenue R(p) = p x D(p) D(p) is quantity demanded for the virtual good at price p Main information we need is just demand each region What is the best and most accurate method of estimating demand?

HOW SHOULD WE ESTIMATE DEMAND? Demand curve describes the relationship between price and the quantity consumers want to buy So many confounding variables can affect the price/quantity relationship, resulting in biased or noisy demand estimates Ideal data for estimating demand: Different (p,q) points in the exact same environment Same region, time and market conditions

CONCERNS ABOUT CURRENT DATA AND METHODS Suppose we want to set prices of Marvel in China. Current data is some combination of: Same product in a different region (Marvel in the U.S.) Different product in the same region (Fast and Furious in China) Industry research Two main concerns: Above information often observe one price/quantity per game Can’t really estimate demand at other prices Current data relies on advanced econometrics, machine learning Biased estimates from OLS-based methods (omitted/confounding variables) Out-of-sample inaccuracy from machine learning (overfitting)

CONCERNS ABOUT CURRENT DATA AND METHODS Suppose we want to set prices of Marvel in China. Current data is some combination of: Same product in a different region (Marvel in the U.S.) Different product in the same region (Fast and Furious in China) Industry research Two main concerns: Above information often only one price/quantity observation per game Can’t really estimate demand at other prices Current data relies on advanced econometrics, machine learning Biased estimates from OLS-based methods (omitted/confounding variables) Out-of-sample inaccuracy from machine learning (overfitting)

PROPOSAL FOR ESTIMATING DEMAND Let’s run an experiment (A/B testing) instead 1.Assign a subset of players in a region into a control or treatment group 2.Each group sees a different price for in-game items Each group provides a data point on price and quantity Effectively allows for tracing out demand curve for each region Significant advantages over previously mentioned methods Confounding variables controlled for in aggregate Data-driven: very few statistical and model assumptions

TRANSFORMING RESULTS INTO ACTION After estimating our demand curve, how to translate to ongoing strategy? Could use different posted prices, but leads to user concerns over fairness and balance Our proposal to solve this: Rather than set different posted prices for different regions, set up random sales, whose frequency and magnitude varies

HOW SALES WORK Every day, the game randomly decides whether or not to run a sale, and how large the sale is Sale applies to region Sale gives an X% discount for all item purchases that day Unknown to users, probability of sale varies across regions How to calculate best sales strategy? Depends on full shape of demand curve Can and should integrate other game data

WHY SALES? Different posted prices lead to user concerns over fairness and balance Kabam can still capture high revenues from high purchasing power users—they may buy even when there is no sale Use of sales may pull low purchasing power users into buying and turn them into high purchase users via ‘lock-in’ and investment in game Easy to brand Can combine with different posted prices if desired

EXTENSIONS With this method, the sky’s the limit when it comes to how to target sales Implement user-specific promotions and strategies Incorporate characteristics such as level, frequency of play, past buying behavior Coupon targeting frequently used by large retailers & advertisers Highly flexible, can be adjusted easily on the fly without disrupting user experience Consider using insights on region-specific preferences and demand when designing future games Example: Adjusting probabilities of receiving different heroes from each crystal (Marvel)